It has been twenty years since The Millionaire Next Door, by Thomas J. Stanley and William D. Danko made its debut, pulling back the curtain on how real millionaires live.

I didn’t read it until after I got into personal finance as a hobby. I would have been well served to read it sooner! Officially, I’m a fanboy and have read most of Dr. Stanley’s books including The Millionaire Mind, Stop Acting Rich, and Marketing to the Affluent. I was deeply saddened to hear of Tom Stanley’s death in 2015, and I was boggled that some journalists took that tragic occasion to criticize the wealth-building process he documented in The Millionaire Next Door. I assure you from both personal experience and the financial blogosphere that The Millionaire Next Door is alive and well in 2016.

If you want to short circuit the entire rest of the review, here’s what you should do: Click my affiliate link below and buy the book. If you want to learn more about why you should do that, read on.

If you've read this book, and if you’re anything like me, your mind has been wracked by the question: Why aren’t I way above Thomas J. Stanley’s wealth line?!?! This post has the answer. The wealth line is not wrong, but the application of the wealth line can benefit from a little clarification. My analysis is below, and I share the values and formulas in this Excel sheet, too.

The central thesis of The Millionaire Next Door is that most people can choose to actually be wealthy, or they can choose to try to look wealthy. Unless they are in the glittering rich segment, which Mr. Stanley defines in Stop Acting Rich as having an annual income of $2M and net worth of $20M, they cannot really do both.

Because the media spend buckets of time covering the vastly wealthy (Buffet, Gates, Branson), as well as rich celebrities (some of whom will not remain wealthy long), ordinary earners (not you!) may be drawn to emulate these glittering lifestyles. But as Stanley says in Stop Acting Rich, these aspirationals will have to be content to order off the appetizer menu since they can’t afford the full meal deal.

An aspirational can lease a Mercedes C230, but the truly wealthy person owns ten cars. The ordinary earner can buy a bottle of Grey Goose vodka (vodka comes in for special scorn in The Millionaire Mind linked below), but cannot throw a party with dozens of cases of super-premium liquor displayed and backlit on ping-pong tables draped in white linen, tastefully arrayed around the backyard swimming pool. Stanley’s conclusion about the glittering rich is that even when they spend lavishly, they spend well below their means.

In The Millionaire Next Door, Stanley & Danko reference a 20% savings rate for many millionaires. Given some of the wealth levels accumulated by modest earners documented in the book, there are other factors at work too. These factors surely include higher savings rates, excellent investment returns, and the tax deferral and investment benefits which are inherent in private business.

Stanley & Danko identify seven factors common to his millionaires which support a “lifestyle conducive to accumulating money.” They are:

They live well below their means

They allocate their time, energy, and money efficiently, in ways conducive to building wealth.

They believe that financial independence is more important than displaying high social status.

Their parents did not provide economic outpatient care.

Their adult children are economically self-sufficient.

They are proficient in targeting market opportunities.

They chose the right occupation.

Millionaires are not, “Big hat, no cattle” people. Instead, they’ve got loads of cattle and are probably wearing a free hat from a seed and chemical dealer. Stanley and Danko’s description of millionaires as "frugal, frugal, frugal" carries through to their clothes, cars, and homes.

Real millionaires drive Toyota Camrys, Ford F-150’s, and Honda Odysseys. Or in Tom Stanley’s words, millionaires don’t wear their income statement or drive their balance sheet. Most of these folks have about 2% of their wealth wrapped up in automobiles, and less than one day’s pay in their suit.

Stanley & Danko share one key insight in Chapter One, Meet the Millionaire Next Door. This insight is called The Stanley Wealth Equation.

"How to Determine if You're Wealthy

Whatever your age, whatever your income, how much should you be worth right now? From years of surveying various high-income / high-net worth people, we have developed several multivariate-based wealth equations. A simple rule of thumb, however, is more than adequate in computing one's expected net worth. Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be."

If you knock around the financial independence community or read Amazon book reviews, you’ll come upon a few consistent criticisms of this book. They center on three things. First, that the Stanley Wealth Equation is flawed. Second, that regular people cannot get ahead any more. Third, that these data are old.

In this post I want to carefully deal with the first criticism, which has fascinated me, and then swat aside the other two. They’re complainypants baloney, and uninteresting besides. Pro tip: When you read, whether a book or blog, focus on what can be gained from the content; the author does not require you to agree with every proposition in order to benefit from his or her work. These latter two criticisms throw the baby out with the bathwater. Instead, if you’re wise, take what’s written, learn what you can, and simply ignore the rest. Albert Einstein said it well: “Great spirits have always encountered violent opposition from mediocre minds.”

The Stanley Wealth Equation says you should be worth 10% of your age multiplied by your annual income. The easiest place to see the trouble with this equation is to take a debt-free engineer with a B.S. degree who has completed college at twenty-two years of age, and whose starting salary is a healthy $65,000.

After one year of work, at age 23 and assuming no raises, this individual should have a net worth of 23 X 10% X $65,000, or nearly $150,000! But even with a 100% savings rate this is impossible. This simple example highlights the problem with the wealth equation.

In this blog post, Dr. Stanley allowed subtraction from your age the number of years after undergrad that you weren’t making money. It was my questions about how all this fit together, and whether Stanley's answer on the blog was exhaustive, that inspired this post.

Here’s the deal on the wealth equation: It’s not flawed. It is derived by analyzing data from people who are already millionaires! It doesn't depict them on their investing journey. The closer one fits the pro forma profile of a Millionaire Next Door, the easier it is to see the validity of the wealth equation. Not surprisingly, the wealth equation is the most accurate the closer one is to the median figures for Stanley and Danko’s profile of a millionaire. The data set is of millionaires as the researchers found them during their research, not as they were when they were building their fortunes.

Stanley and Danko’s prototypical millionaire in 1996 is 57 years old, has a median income of $131,000, and a median net worth of $1.6M. Elsewhere in the book Stanley references 20% and greater savings rates.

Herewith I give you “The Matt Miner Path to become the Millionaire Next Door.”

I constructed three scenarios. In the first scenario (Table 1) I simply take The Millionaire Next Door and ask what he or she looked like at age twenty-one based on Stanley’s model. In the second scenario (Table 2) I apply some additional assumptions to try to create a more realistic scenario for the Millionaire Next Door, circa 1996. In the third scenario (Table 3), I fast forward to the present day and offer my version of a 2016 Millionaire Next Door, adjusting for a different start date in the workforce, and the inflation that has occurred since 1996. I was curious if this third scenario would pass the smell test (spoiler alert: it did).

A full explanation of my assumptions is at the end of the article, and here is a direct link to my data, too. The tables, as pasted are a little scrunchy; I may try to improve the formatting in the future. Otherwise, consider using your browser's zoom, or just open my data file.

Table 1: You can clearly see in Table 1 that at age twenty-one, in 1960 this future-millionaire’s income is unrealistically high and his expected wealth is nonsensical. Median family income in the U.S. in 1960 was approximately $5300.

Table 2: Reconstructing the Millionaire Next Door, 1960 to 1996

Table 3: Fast forward to 2016

A few fascinating insights for me:

Given my set of assumptions below, you don’t even land on Dr. Stanley’s wealth line at a 20% savings rate until age 45. On the wealth line you qualify as neither an Under Accumulator of Wealth (UAW), nor a Prodigious Accumulator of Wealth (PAW), but rather you simply have the expected level of wealth (an Average Accumulator of Wealth (AAW). Prior to age 45, you have been a UAW, BUT due to compounding, in just twelve more years, you will qualify stoutly as a PAW.

It would have been helpful to say in the book, “as a 57-year-old millionaire, you can class yourself as a UAW, PAW, or just an AAW, but prior to this age, your mileage may vary.”

Further Assumptions

Income growth: In Tables 2 and 3, from ages 43 to 57, income grows just in line with inflation. Based on my observation that many people experience the fastest earnings growth in the first half of their careers, income grows at 7.83% per year from ages 21 to 42 in Table 2 (1960 to 1996), and at 6.73% over the same ages in Table 3 (1980 to 2016). The difference in the growth rates between Tables 2 and 3 is reflective of the higher real wages in 1980 than 1960.

Although these income growth rates may seem rapid, it is important to recall that Stanley and Danko’s study subjects are not only earners on the high-end of the earnings distribution, they are also sufficiently motivated to become financially independent. I can attest that while these growth rates are strong, they are highly achievable by focused, motivated, hard-working people in America. My own wage growth from 2002 to present is 10.38% (CAGR).

Predicted wealth by Wealth Equation: A calculation of the Stanley Wealth Equation at each age and income level.

Actual wealth / projected Actual Wealth: In the case of Tables 1 and 2, this is simply the median reported wealth from the book. In Table 3, I apply an inflation multiplier to project 1996 dollars to 2016.

Wealth by savings rate: These columns are the key insight from these tables. Here I apply different savings rates to incomes. Returns and wealth amounts are in nominal dollars, with the final-year calculations representing my calculations of amounts in 1996 (Table 2) and 2016 (Table 3). I calculated savings rates between 15% and 40%. Many extreme savers are hitting rates of 50% to 80%. Obviously, many extreme savers plan to be financially independent well before age 57.

Investment returns & inflation: In all cases I assumed a 5% real rate of growth for investments, and calculated inflation using the inflation calculator at inflationdata.com. To calculate nominal investment growth, I took the 5% real rate of return and added the inflation for the given year.

Backward-looking annual inflation: Here I plug in the year prior to the named year and the named year in the inflationdata.com calculator and figure an annual inflation rate.

Nominal income growth: As already discussed, nominal income growth is calculated with rapid, above-inflation rate growth in the first 21 years of a career and then at the rate of inflation from age 43 onward.

The starting wages are the median family income pulled from the 1961 and 1979 Current Population Reports and discounted for inflation to get to my base years. The notion that these millionaires likely started their earnings journey at the level of a median family just “felt” right to me. Starting at lower earnings than this would obviously have required even higher growth rates in the early years.

Objections 2 and 3 to the book

Regular people can’t get ahead any more. This complainypants excuse is the worst. I’m an employer, and I can’t find enough people with the integrity and work ethic to do the jobs we need done. If you will work hard, plan your spending, and save some money, you can definitely still get ahead. We live in an incredible time, and most of us live in incredible places with opportunities our grandparents could not have imagined.

The data are old. This one is what it is, but Stanley validated that this segment of Millionaires Next Door is going strong in his more recent book Stop Acting Rich. Also, as you look at my analysis of what a Millionaire Next Door looks like in 2016, I think the numbers will appear relatively reasonable to you.

Stanley and Danko's book is revealing and helpful, and now you have a framework for evaluating your progress toward becoming the Millionaire Next Door. It's a great journey and terrific destination.